Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Road test: St.George Super Fund Home Loan
The Australian Tax Office’s (ATO) draft ruling that allows SMSF trustees to make improvements to a property purchased using borrowed money will drive the rapid development of tailored lending products. In Commonwealth Bank launches Super Gear loan, I reviewed the Commonwealth Bank’s super gearing product. Another bank active in this space is St.George, which has a facility called the ‘St.George Super Fund Home Loan’.
A quick re-cap on the key rules and risks in borrowing to invest in property. Firstly, your SMSF can’t buy a property from yourself or a related party, or rent a property to yourself or a related party. It has to be a legitimate purchase of a property from an unrelated party on commercial terms – everything has to be on an ‘arms length’ basis. Secondly, you can’t use borrowed money to improve the property, however, you can use existing money in your SMSF to fund the improvements.
On the risk side, the biggest risk may be exposure to a single asset. While property might do well, other asset classes might do a lot better. Moreover, if your SMSF needs some money in a hurry to pay a liability or start paying a pension, property is not particularly liquid. You can’t sell the ‘front bedroom’ and keep the rest – so make sure the property is part of the overall asset mix. Like any geared investment, even if it is positively geared, the ultimate return will largely depend on any capital gain from selling the property – so invest carefully.
How the St.George facility stacks up
On paper, it looks pretty attractive with high lending ratios, competitive interest rates and terms, and a unique offset facility.
Loan sizes start at $100,000, and go up to a maximum of $2 million against residential property. The loan to value ratio (LVRs), which is the amount of the property’s value your fund can borrow, is favourable, and depends on the type of property and SMSF trustee structure as follows: